Sunday Night Grain Outlook, 8-1-10

Sunday Night Grain Outlook
By Duane Lowry
Sunday, August 1, 2010

OPENING CALL:
Corn= 1-3 lower,     Wheat= steady-easier,     Soybeans= 2-4 lower.

Weather will provide favorable/non-threatening conditions during the next two weeks for the US Midwest. Parts of the Delta prefer more moisture. Russian areas suffering from extreme heat and dryness have little precip opportunities in the two-week outlook, but temperatures are set to cool by next weekend. Russia's weather outlook will be seen as not offering any beneficial change.                       

News> Egypt bought 3 cargoes of Russian wheat. (It seems strange that Russia would be offering wheat for export right now. It seems even stranger that they would allow it out the door at roughly $20 cheaper than the wheat offered from other origins.) Rumors exist that Argentina may consider ending/lowering its grain/soy export taxes after August 24th, but this seems highly unlikely and not before a drawn out fight. Argentina currently imposes a 23% tax on wheat, 20% on corn and 35% on soybeans.   

Wheat will open at 6:00 Chicago time. Beyond that, most everything else is a guess, but hopefully an educated guess. The Russian weather storyline will remain the same as last week, as there is basically no relief in sight for key areas of the central, southern and Volga districts. However, roughly 60% of the countries spring wheat is grown east of these regions and have not suffered the same fate. The real question here is when does the market reach the point where worst-case scenarios have been factored in. Nobody knows. Have we reached the point where production loss projections have been overstated? Nobody knows. The trade really won't have a current benchmark on the situation until USDA offers their latest assessment August 12th. Yet it may be equally important to recognize clear historical patterns in weather markets and the potential for the bull markets to end before the weather forecasts themselves suggest an end is warranted. Considering world and US carryout levels, the Russian problems are occurring at a time when the world is best capable of handling the abrupt development and change in world carryout projections. This leads me to conclude that the trade/market will reach a point where it does significantly overreact, but whether that is now or not leads us back to the same basic answer. Nobody knows. However, it is important to recognize global supply statistics and an assessment of where Russia's crops are grown and that not all crops are impacted by the current drought, will lead to a conclusion that the problem is very workable from a global perspective. This leads me to believe that current prices are ultimately unsustainable and during the majority of time during the next 6 months Chicago futures prices will be at price levels below current values, but we are still looking for that elusive culminating price spike. There is plenty of fundamental rationale that suggests this entire situation is exceeding fundamental price justification, but who knows when the emotional spike will end. It is also important to know that new-crop wheat futures have reached levels that will expand both US and global wheat acreage. Yet, maybe the bottom line is that the public is still willing to fan the flames on this storyline. One last thing needs to be mentioned and may have an impact on early sentiment tonight and that is Egypt's weekend purchase of 3 cargoes of Russian wheat at prices still deeply discounted to other world origin values. Why? Why would Russia sell wheat and sell it at cheaper values? What should we conclude from this in terms of the overall scope of the problem? Should we conclude that the exporters who are holding this inventory now designated to Egypt question whether domestic Russian prices will ever get high enough to make that inventory more valuable inside Russia, or were they just fearful of getting caught holding those supplies when an export ban is announced? Are we to conclude that the exporters holding that supply see the wheat/feed grain situation of Russia in its entirety and determined Russian wheat supplies were still worthy of a sharp discount to other origins? There is a lot that doesn't make sense here, which may argue that current futures prices have already exceeded justified levels.                                

Corn will likely be most influenced by wheat price action. US corn production ideas are on the rise. As the crop progresses, anecdotal reports from the country are clearly increasing confidence that the corn crop will be better than recently expected and quite probably better than last year. If/when the wheat market decides enough is enough; the corn market will find supply factors overshadowing any possible increase in exports due to changes in global feed supplies. If there is a bullish storyline for corn, it won't be the 2010/11 balance sheet, but will instead be the potential for an acreage battle storyline to develop. Ultimately, this will suggest the least bearish aspect/most bullish aspect of the corn market will involve the 2011 crop. Let's recap the 2010 growing season for a moment. The US corn crop was off to an early and exceptional start in most key areas. Great uniformity was seen and production potential was high. Then we had areas that suffered from excessive moisture and created elevated yield vulnerability. The greatest risk in these areas was from a sudden end to moisture and root masses that couldn't handle drought conditions well. However, that didn't happen and those areas most impacted by excessive moisture received the best possible follow-up weather patterns and therefore avoided the loss of production potential to the degree feared. As for those areas not impacted by excessive moisture, most acres are poised for record production under optimum temperature/moisture combinations. It is very possible that US national yields are able to climb far enough above current ideas to more than offset any expected possible increase in export demand due to the Russian problems.  While not popular amid the elevated emotional environment, I see significant downside potential in corn from current price levels.              

Soybeans don't have an independent storyline for sustaining current price levels. Current US production ideas will prove to be far too conservative and carryout projections will ultimately build from current plentiful levels, despite solid Chinese import expectations. Technical conditions warn that Friday's upside breakout will lack the ability to generate sustainable follow-through. Ultimate downside potential to harvest lows is very significant from current levels.                                 

In summary, wheat will be the trade's primary focus. Friday's late surge in all three markets doesn't seem justified and could easily allow for all markets to open lower. Egypt's purchase of Russian wheat could also be seen as a reality check and therefore lead some to believe current wheat future prices have exceeded fundamental merit. Generally benign US weather forecasts amid elevating US production ideas could easily prompt a lower sentiment towards corn and soybeans. However, it appears everything will initially hinge on how much emotional buying interest exists in wheat. Personally, I think last week's price action offered many culminating aspects and we should see prices turn downward this week, allowing for an increased focus on elevating US production ideas.              

This newsletter is prepared from information believed to be reliable. Early Market News, Inc. does not guarantee that such information is accurate or complete and it should not be relied upon as such. Opinions expressed are subject to change without notice.